Manager Search, Selection, and Monitoring

Question 1

Manager Search, Selection, and Monitoring

Answer 1

1. Identify the elements and categories of manager search and selection
2. Adopt a manager search methodology using standard criteria for manager/index selection, including qualitative and quantitative criteria
3. Adopt hedge fund manager search methodology using standard criteria for manager/index selection , including qualitative and quantitative criteria
4. Establish expectations and criteria for manager search
5. Evaluate short term versus long term results
6. Evaluate passive versus active strategies
7. Evaluate past performance for manager search and selection
8. Use active manager databases and other research
9. Explain components of the individual manager interview
10. Evaluate different structures
11. Execute active share research
12. Describe manager styles
13. Identify issues with manager composites
14. Identify the benefits and caveats of manager structuring including a multi manager approach
15. Implement a core satellite approach
16. Conduct manager search and perform due diligence
17. Monitor qualitative and quantitative manager attributes
    Note: this list came from an old IWI (IMCA) document. We do not think you’ll be tested on
    the specifics but a review of the elements to be reviewed in MS&S is important.

Question 2

8 P’s of Manager Search & Selection

Answer 2

1. Philosophy
2. People
3. Plans
4. Product
5. Process
6. Progress
7. Price
   8 PERFORMANCE (make sure this one goes last!)

Question 3

Upside & Downside Capture

Answer 3

An upside capture ratio over 100 indicates a fund has generally outperformed the benchmark during periods of positive returns for the benchmark. Meanwhile, a downside capture ratio of less than 100 indicates that a fund has lost less than its benchmark in periods when the benchmark has been in the red. If a fund generates positive returns, however, while the benchmark declines, the fund’s downside capture ratio will be negative (meaning it has moved in the opposite direction of the benchmark).

Question 4

Performance Attribution Analysis

Other terms for active asset allocation and active asset selection

Answer 4

Determine the excess return (outperformance) that comes from:

a. active asset “allocation” = market timing = tactical allocation
b. active asset “selection” = security selection = stock picking

Question 5

Active Share

Answer 5

• active share represents the percentage of company stock held in a mutual fund or portfolio that differs from the composition of an applicable index or benchmark
• the greater the difference, the higher the active share
• active share, as a metric, is used to identify how much a portfolio deviates from an index and may be used to spot “closet indexers”, managers whose portfolio tends to reflect a high level of exposure similar to an index.

Active Share = ½ Σ |(Wt of Stock i in Fund) - (Wt of Stock i in Index)|

Question 6

Active Share conclusions

Answer 6

• preliminary conclusions indicate the higher the active share the higher the performance (i.e., active management is adding value)
• this research is often debated as results are not conclusive and “active management” may not be causative

Question 7

Conduct manager search and perform due diligence

Answer 7

• the process of conducting an investigation into a potential investment in order to confirm facts and discern risks
• also described as the “level of care taken by a reasonable person before making an investment “ due diligence is also performed on an ongoing basis